HSBC’s strategy review has given its detractors
plenty of ammunition. By announcing a $130 billion
risk-weighted-asset reduction plan in the global banking and
markets division (GBM), it cemented a view, held by rival
bankers, that it lacks the commitment, balance-sheet and
product capability to be considered a truly full-service
emerging market investment bank to rival Citi.

The move also emboldens critics of complex universal-banking
operations, which argue banks such as HSBC consistently
over-sell the benefits of scale, given regulatory costs and
capital inefficiencies. Since 2011, HSBC has been forced to
enact 78 business disposals, including 15 full country exits,
with retail operations
in Turkey and Brazil the latest announced
closures.

Rival bankers downplayed HSBC’s
investment-banking clout during the
Euromoney awards’ pitches, and argued its plan
to sell strategic events-driven advice to its flow clients was
now in tatters.

However, to suggest there will be a pronounced reduction in
HSBC’s capital allocation to investment banking,
akin to its retrenching peers – with a downsized
secondary sales and trading platform to support events-driven
credit and equities mandates – is to misunderstand its
business model.

Market share

HSBC has a wholesale financing-led platform to capture
growing cross-border capital and trade flows amid strengthening
demand for capital products by unlevered emerging market
corporate clients, in particular. Rather than divesting, HSBC
is gambling that growing its revenue sources will meet ROE
targets, thanks to a targeted adjustment of its balance
sheet.

HSBC will offset its GBM RWA retrenchment by reinvesting
$180 billion-$230 billion in higher-returning businesses in
Asia. It still plans to grow its FX and DCM capabilities
globally, especially its emerging Asia credit platform, as well
as its M&A and ECM business, with the bank increasing its
market share in the latter two business streams every year for
the past four.

In announced emerging market M&A between May 1 2014 and
April 30 2015, HSBC is in sixth position, for example. HSBC
will also seek to carve out its corporate operations in any
deal to sell off its Brazil unit, given the health of its GBM
revenues in
Latin America’s largest economy. HSBC also
plans to increase its export- and project-financing capacity in
Asia and its complex risk advisory business.

The $40 billion RWA reduction plan in Spencer
Lake’s capital-financing group – which
comprises its debt, equity and M&A business – over
the next three years could be accomplished relatively smoothly
without imperilling mandates. Some 60% of this will be achieved
from improving data models, and the rest will come via
securitization and selling loans, in particular, those backed
by project and export risk.

Crucially, most of these loans are at, or above, par and
HSBC is already in discussions with real money fixed income
buyers on 25 such transactions. Given the growth of local
capital markets, this shift to maximize the efficiency of its
balance sheet shouldn’t undermine client
relationships, given the health of local-bank liquidity, from
Mexico to Saudi Arabia, and the expansion of the
project-finance bond market.

The execution challenge in reducing its GBM-related RWAs,
outside the capital-financing group, is more acute, given the
prospect of the long-dated derivatives book and legacy
positions being offloaded in a rising rate and illiquid
environment. Still, HSBC has a captive network of 8,000
corporate clients that most banks would kill for, given the
investment-banking opportunity. What’s more, there
is evidence that its bid to become more client-centric, by
grabbing strategic GBM mandates from blue-chip commercial
clients, is paying off.

HSBC acted in March last year as financial adviser for
Beijing Capital Group, a CMB customer, in its successful $800
million bid for Australia’s Transpacific
Industries Group, a waste management firm. The fixed-income
division of the capital financing group has enjoyed a 4.4%
compound annual growth in recent years. Meanwhile, its
financing-led work for Li Ka Shing over the years has generated
bumper ECM and M&A revenues, accounting for
HSBC’s mandate to advise Hong Kong’s
Hutchinson on its £10.3 billion acquisition of O2, for
example.

HSBC’s China business remains the envy of its
peers. Over the past year, it has become the dominant player in
the Shanghai-Hong Kong Stock Connect, with a comprehensive
front-to-back operation, providing custody to clearing. It
already makes $1.7 billion from its RMB internationalization
business and that is set to grow to $2.5 billion by 2017.
What’s more, HSBC is the only foreign bank with a
growth strategy in the Pearl River Delta (PRD), the largest
metropolis in the world with a population of over 42 million,
and which will soon be linked to Hong Kong. It will increase
its project-finance lending capacity – even as the
credit cycle on mainland China sours amid slower growth and
over-capacity – and build a retail and
wealth-management arm in the region to generate $1 billion of
pre-tax PRD-related profit in the coming years.

HSBC is probably over-estimating the equity-return
opportunity in Asia in the short term, given slowing trade and
credit growth, tight wholesale-banking margins,
investment-banking over-capacity, and China’s
disorderly economic adjustment. It could continue to ignite
shareholder ire and be forced to enact bolder RWA cuts. But,
for all that, it may turn out to be cannily positioned for the
long term.

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